Notice that all links related to the Italian election
are in the Special. Bernanke's testimony at 15:00 GMT the next event.

Joke of the Day: Berlusconi's
attempt to leave his young girlfriend in the background backfired, as markets
began to wonder if the old playboy had lost his touch and libido. The voters
were scared that if they would have voted for Berlusconi, the previous
scandalous headlines could have ended soon. Thus it was better to vote a ragtag
group of ex-communists and Brussels-introduced technocrats to form a government
together. This was the best way to guarantee headlines for the future,
commentators said.

Boy, it will be a busy week. My gut feeling is that this week will be remembered as the straw that did the camel in. The camel has no double hump, it is a double-w, and the end of popular support for the euro is has landed. Noticeable, very 1998-like reaction in JPY and especially in EURJPY.

Monday, February 25

Note that all coverage of the Italian elections is in the Special post. What a day: JPY move astounding, EURUSD within normal bearish daily range (the move only looks huge if you include the intra-day rally ahead of the first election results), stock markets sold off. So, EURUSD is down a lot, and dropped below key support areas. Technically difficult environment: the longer-term bull trend looks like it has ended, but are we in a bear trend now, or just range-trading for a while? I'm looking forward to Bernanke's talk tomorrow at 15:00 GMT and on Wednesday as well - he has even more reason now to sound a bit dovish. But... if they start to grill him on the effectiveness of the QE programs, and his answers seem weak, the fears that the QE is about to end might flame up again. I'll be watching the charts..

Expect first exit polls after the voting is concluded at 14:00 GMT. See my Special for coverage. I'm skeptical: The Bersani-Monti coalition probably wins, but will they be able to govern the country and push through reforms and austerity with GDP seen dropping again in 2013? I think the government will stand for six months or so. EURUSD long bias for now, sell later when people again get very happy.

Saturday, February 23

The last week reviewed – and the next previewed!
Previous Weekly Supporthere.

What a week: Fed minutes reveal end to QE is perhaps closer than we were led to believe. European Commission presented its terrible macroeconomic forecasts. UK gets downgraded and markets seem nervous. Next stop will be the Italian election.

Friday, February 22

Today's German IFO sentiment index surprised to the upside, though I see the numbers to be of mediocre quality after digging deeper behind the headline numbers. The repayments of LTRO2 were significantly less than expected (so the implicit monetary tightening by removing liquidity did not happen, and EURUSD sold off). The European Commission released its updated economic forecasts, and the numbers are grim. The 2013 will be spent in recession, just like 2012. And now all eyes on the Italian elections. Bunga bunga!

I'll try to post a "Best of the Week" and a Special on the Italian elections later today. Come back during the weekend for my usual posts.

Recession
and threat of deflation. Let’s just repeat the past and demand the impossible
(WWI-war reparations then vs. untenable sovereign and private debt now), keep
the exchange rate fixed (gold then vs. euro now), let’s not believe what
economists are saying (Keynes then vs. everybody, including the IMF now), let’s
not admit any mistakes and just observe while attitudes and values change to
the extreme.

Then we can
collectively wonder how it happened again and why we didn’t learn our lessons
from the previous episodes. The only thing that I am not sure about is will the
next guy have moustache, beard or be clean-shaven, and will he land in Brussels
or in some of the nation states.

This is too
easy to interpret. Just like the ending of the ‘Matrix’, you don’t even
have to look – you know where the kicks and punches will be coming from.

Jesus, John
Lennon, Stephen Hawking and Chuck Norris working together would not be able to keep the European
monetary union flying. The European Union and especially the euro are from the
point of game theory assured failures.

Sunday, February 17

Macronomics has a good post warning about the risks that rising interest rates and possible revaluation of balance sheets poses to current high asset prices. When expectations are high, disappointment often follows?

Economists
are still debating the central banks’ role in the world: what to target and
how? After the previous inflation- and unemployment goals and the latest
NGDP-targeting, now directly targeting asset prices is the hot topic. Minimum wage
is another topic after US shows signs of raising it (would help to raise the
inflation as well). But the most important issue will be the global currency
wars. Fiscal and monetary policies have met limits, and I believe 2013 will be
remembered as the year when the wars started.

In markets,
stock market valuations are debated and the old hand Mr. Soros has enriched
himself by a cool 1bn shorting the yen.

A busy week
– markets were dull, but we had a near-miss comet, an asteroid hitting Russia, North Korea’s nuclear test, pope resigning… by
virtue of mean reversion, one should now expect a highly volatile market week
while newsflow is zero? Next week will be about the Italian elections (no polls allowed anymore) and Cyprus (first their election, followed by the bailout-talks).

Thursday, February 7

ECB meeting
burned the EURUSD. Friday’s close will set the tone for the next week, so it
will be an interesting end to the week – even though calendar looks empty for
now. Federal Reserve's Evans gave an interview and I believe his statement on the possibility of ending QE already when unemployment is above 7% was overinterpreted - or it was just an excuse to continue selling the EURUSD. I would not be surprised if we would see a bounce on Friday. Next market-moving event will be the clarification of the Fed's QE-policy.

It's political, stupid!
I posted my 'view' on Sunday, this is an update to that.First, some talk. Europe is not going to hell because Rajoy might have taken some 30,000 euros annually, or Draghi spent his time at the Bank of Italy fiddling his thumbs instead of supervising the banks. Europe is in trouble because of the elections. The pro-European parties are beginning to lose in the polls because the popular opinion is moving against foreign bastards - not only in Spain, but more so in Brussels, Berlin and Paris. In Germany, Merkel is already having hard enough time explaining to the Bundestag why they should give more and more, and why austerity is not working. In Spain, Rajoy's government is going to find it very hard to push additional reforms and find political friends, and the economy might be hit by protest strikes and demonstrations soon. While Spain was promised more time to meet the budget deficit ceilings, it is obvious that austerity is not working in the PIIGS, and we will not see any more austerity in either Italy or Spain for the moment.

It was just a question of time when the bond markets realized this. I think markets have known this for a long time, but have trusted the ECB's promise to do 'whatever it takes'. Markets simply forgot that the OMT program is conditional (must apply for Troika program, country must be accepted into the program by other countries and then the applicant must fulfill Troika's demands, or the OMT will close. I believe markets are calling this 'greatest bluff in history' right here and now. I would like to remind what Bruce Krasting said earlier on the OMT (Finnish version here).

What happens now? The EU budget is still open, Italian elections are ahead, the bailout of Cyprus is to be agreed on, and then there is the zero growth, record-high uneployment and record-high debt levels. Greece is bound to disappoint again as well. I believe the euro crisis is lighting up again. Given what we've seen before during the past 3-5 years, we already know how this goes: 1) Problem denied 2) Problem ridiculed 3) Angry comments, lousy verbal intervention and stupid actions like banning short-selling etc 4) capitulation - either a) all hell breaks lose, debts are restructured and possibly the euro breaks or b) another massive 'believe me'-OMT-type solution or 'death star'-guarantee vehicle will be presented.

Note that the next charts only paint the picture for the current week: market to continue selling off until the Thursday's ECB meeting - after that is finished and nothing comes out of the bank, perhaps we rally again. I'll update again. Oh yeah - click the charts for larger versions.

The zoomed-out hourly chart shows the rising channel and the previous major top - that is the target of this move. It would still be a correction in a bullish trend. I also marked what happened the last time after a fast correction.

The five-minute chart shows the last couple of day's fall in the EURUSD (including Friday's wild ride). Note that there has been no technical strength in the chart - the market has kept coming down 'like a waterfall'.

Given the 'waterfall' behavior, and that we have now returned to the previous resistance levels, what should we do? Eventual target 1.3400, currently 1.3500, 100 pips? Sell the pair.